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India and Russia signed cooperation deals worth up to US$10 billion during Prime Minister Putin’s visit to India in March 2010. Attempting to diversify the economy away from energy, Russia could benefit from improved trade relations but also from India’s technological know-how, whilst India will be able to use Russia’s nuclear technology to address its energy shortages.

Cooperation is focused mainly on nuclear energy and military technology but there are wider spillovers:

  • Russia is expected to build 16 nuclear reactors in India. Nuclear energy will relieve India’s power shortage, which has posed a challenge to the country’s growth;
  • The military industry is an important source of employment in Russia and of foreign currency, through export. Military cooperation has contributed to the development of other technologies, including Glonass, the Global Navigation Satellite System, intended for military and civilian use;
  • Trade between the two countries remains below potential, with Russia’s exports to India amounting to 1.2% of total exports in 2008 (latest year available). Exports to Russia represented only 0.8% of India’s exports in 2009.
Share of India’s and Russia’s electricity produced by nuclear generation and consumption of nuclear energy: 2004-2009
% of all electricity produced and million tonnes of oil equivalent

Source: Euromonitor International from OECD, BP Amoco, BP Statistical Review of World Energy.

Implications

BRIC economies (Brazil, Russia, India and China) are increasingly looking to each other as an alternative to the West, working towards greater flows of investment and trade:

 

  • Russia was hard-hit by the global economic crisis of 2008-2009, as the slowdown resulted in reduced oil demand – one of its main exports. Real GDP growth fell from 5.8% in 2008 to -9.0% in 2009;
  • India suffered less due to its strong domestic market, with real GDP growth slowing to 5.6% in 2009, from 7.4% in 2008. However, power shortages remain one of the main vulnerabilities. Russia’s capital and experience with nuclear energy could remove this obstacle to growth and improve the business environment;
  • Russia’s reliance on exports of mineral fuels – 63.8% of exports in 2009 – is a vulnerability that Russia is keen to thrust aside with a move towards a knowledge-based economy. Cooperation with India, known for its technological savvy, would aid Russia to boost foreign investment and productivity. FDI inflows to Russia reached 3.2% of GDP in 2009 according to national statistics estimates, down from 4.2% in 2008;
FDI intensity and real GDP growth in Russia: 2004-2009
FDI inflows as % of GDP and % real GDP growth

Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics.

 

  • There are concerns that Russia’s military cooperation with India could lead to greater tensions between India and Pakistan, contributing to regional instability. However, Russia has shown commitment to BRIC cooperation;
  • Russia is planning to set up a free economic zone in India, a preferential setting for the development of chemical and metallurgical cooperation centred on titanium. The project would involve investors from other countries, with hopes for technology spillovers;
  • Enhanced trade cooperation would benefit consumers in both countries through boosted employment opportunities – in the weapons industry in Russia and in nuclear construction in India. Russian consumers could also benefit from greater access to India’s cheaper manufactured products.

Prospects

India and Russia are looking to other areas of cooperation, including telecommunications and further expansion of trade:

  • The governments have announced a target of increased bilateral trade between the two countries, from US$7.5 billion in 2009 to US$10 billion in late 2010 and US$20 billion in 2015.

This would contribute to economic recovery:

  • Real GDP growth in Russia is expected to rise to 3.6% in 2010 and 3.4% in 2011, partially thanks to improved oil prices. India will continue on a road to recovery, reaching real GDP growth of 7.7% in 2010 and 7.8% in 2011.

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